South Africa enters economic deep freeze

June 10, 2014|By Ed Cropley | Reuters

By Ed Cropley

JOHANNESBURG (Reuters) - Winter arrived in South Africa this week, covering hills and highlands with snow in a fittingly chill metaphor for an economy beset by everything from labor unrest and flat-lining output to rising inflation and waning external confidence.

South Africa's problems are many and complex but at their root is the collapse of the balance struck in the dying days of apartheid between the predominantly white world of business and the predominantly black one of organized labor.

The deal that underpinned the mechanics of the "new" South Africa until a 2009 recession saw strong unions, allied to the ruling African National Congress (ANC), delivering workplace stability in return for wage increases slightly above inflation.

Now, weak growth, ideological turf wars in the ANC, cynicism and neglect by union bosses and management, and fallout from events such as the police killing of 34 strikers at a platinum mine in 2012 have left that model in tatters.

"It's as bad as it's ever been - probably the lowest point of our labor relations," said Andrew Levy, a labor consultant at Andrew Levy Employment in Johannesburg.

"We've lost all sense of good-faith bargaining. The bargaining is in the utmost bad faith."

RECESSION FEARS

Front and center is the longest and costliest strike in the 130-year history of South Africa's mines, a five-month walkout by 70,000 members of the platinum sector's AMCU union that triggered a first-quarter decline in national output.

The first GDP contraction since 2009 sparked a rare sense of urgency from President Jacob Zuma's new administration but efforts to end the strike failed again this week.

The local economy in Rustenburg, the 'platinum city' whose growth since the end of apartheid in 1994 has been likened to the Klondike gold rush, is collapsing with dramatic effects.

Nationwide business confidence slumped to its lowest since the start of the millennium in May, while consumer data such as vehicle sales have shown 10 percent year-on-year declines in the last two months.

Meanwhile, the increasingly militant NUMSA metalworkers union, South Africa's largest, is threatening a strike that would hit auto production - 6 percent of the economy - and the construction of two huge and desperately needed power stations.

Central bank Governor Gill Marcus played down the threat of a full recession but was hardly sanguine about the outlook for an economy overtaken this year by Nigeria as Africa's largest.

"Even if a recession is avoided, it will be cold comfort if the growth rate is a weak positive number," she said on Tuesday.

"It behoves us all - government, business and labor â to

rebuild the confidence and trust that is an imperative to change the negative trajectory that the economy is presently on."

Her deputy, Lesetja Kganyago, put it more bluntly last week.

"Monetary policy can help staunch the bleeding but it cannot heal the patient," he said.

WEAK RAND

On top of it all, a weak rand has pushed inflation above the top end of the central bank's 3-6 percent target band, just as ratings agencies Standard and Poor's and Fitch draw up their latest views on the economy and government finances.

Pretoria's credit rating is still two pips above investment grade, a consequence of sound fiscal management over the last 20 years, but most analysts are predicting downgrades.

In the short-term, the ANC is inoculated from fallout from the poor state of the economy thanks to the 62 percent majority it won in May's election.

But it knows that without strong growth it cannot afford the social and healthcare policies it wants to roll out to address the inequalities left by decades of white-minority rule.

The May elections also brought the ultra-leftist Economic Freedom Fighters, led by renegade ANC youth leader Julius Malema, into parliament - to the disdain of Zuma, who snubbed the EFF at the vote count in Pretoria.

However, it is Zuma who is showing the strain.

The 72-year-old was admitted to hospital on Saturday after being told by aides and the ANC's top brass that he needed to rest after the exertions of the election.

Quickly discharged after "routine" tests, he is nevertheless missing a cabinet meeting this week, allowing his deputy, respected unionist-turned-tycoon Cyril Ramaphosa, to preside.

A polygamous Zulu traditionalist with no formal education, Zuma has never been known for strident leadership, especially in economic matters.

If his energy levels are lagging, he is even less likely to push for fundamental changes - from executive pay to strike laws to a migrant labor system in the mines that has changed little since the end of apartheid.

"Zuma's style, right from the start, has been characterized as 'soft-in-the-middle', based primarily on not making decisions and satisfying different constituencies to keep the political balance," said Cape Town-based political analyst Nic Borain.